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Writer's pictureEiger
3 days ago9 min read

Retirement's Hidden Challenge: Are You Ready for Healthcare Costs?

As you approach retirement, a critical aspect of your financial strategy often catches even the most prepared individuals by surprise: the cost of healthcare. For decades, employer-sponsored health insurance may have provided a safety net, shielding you from the complexities of healthcare expenses. But retirement ushers in a new, unfamiliar healthcare landscape that demands attention and planning.


When Employer Insurance Ends

The transition from employer-subsidized insurance to self-managed healthcare can be daunting. Gone are the days when your employer helped navigate plan options and covered a significant portion of your premiums. In retirement, you’ll face the task of evaluating a variety of plans, deciphering coverage options, and shouldering out-of-pocket costs.


The Rising Cost of Healthcare in Retirement

The numbers are sobering. Fidelity’s 2024 Retiree Health Care Cost Estimate reports that an average 65-year-old needs $165,000 in after-tax savings for healthcare expenses in retirement—an increase of nearly 5% from 2023. And that doesn’t account for potential extended care costs.


What’s Driving These Costs?


  • Healthcare Inflation: Medical costs consistently rise faster than general inflation.

  • Longevity: Longer lifespans mean more years of healthcare expenses.

  • Advanced Treatments: Cutting-edge medical procedures come with hefty price tags.

  • Increased Demand: The aging Baby Boomer population strains healthcare resources.


Women, in particular, face higher costs due to their longer life expectancies. By age 65, healthcare expenses may consume 15% of annual spending, a figure projected to nearly double by 2040.


Healthcare Challenges Before Age 65

For those retiring before Medicare eligibility at 65, the gap can be a financial and emotional strain. The four primary alternative coverage options may help bridge this period but often come with high costs and complexities.


  • COBRA coverage: The merged Omnibus Budget Reconciliation Act of 1985, or COBRA, allows you to continue your current health care coverage for a certain amount of time, but you may be required to pay the full cost of your health coverage, including the amount your employer had subsidized, plus an additional 2% charge.


  • Spouse's plan: If your spouse or domestic partner is employed and has health coverage, you may be able to get coverage on their employer's plan.


  • Public marketplace: The Affordable Care Act established the public market and provides plan options available to anyone who is not yet eligible for Medicare. Costs for these plans can vary widely.


  • Private insurance: To obtain coverage, you can also look to your local health insurance agent, trade or professional associations, and other so-called "private exchanges" that offer plans from multiple carriers. You may have more plan options available through these outlets than the public marketplace.


Medicare: A Critical Pillar of Your Plan

Medicare becomes available at age 65, but many retirees are surprised by its gaps. While it covers basics, supplemental insurance (like Medigap) or Medicare Advantage plans may be necessary to cover dental, vision, and other essential services. We're not Medicare experts, but we can connect you with somebody who can take you beyond this brief overview.


Key Medicare Components

  • Part A: Hospital insurance, often premium-free

    • Helps pay for inpatient care at hospitals, skilled nursing facilities, hospice, and covers some outpatient home health care.

    • Part A is free if you worked and paid Medicare taxes for at least 10 years. You may also be eligible because of your current or former spouse’s work.


  • Part B: Medical insurance, with income-based premiums

    • Helps cover Services from doctors and other healthcare providers; Outpatient care; Home health care; Durable medical equipment; Some preventive services

    • Most people pay a monthly premium for Part B. The exact premium depends on your income level.


  • Part C: Medicare Advantage, bundling Parts A, B, and sometimes D

    • Private companies run Medicare Part C. The federal government approves each plan. Costs and coverage types vary by provider. It’s an alternative to Parts A and B that bundles several coverage types, including Parts A, B, and usually D. It may also include:

      • Vision

      • Hearing

      • Dental

    • You must sign up for Part A or B before enrolling in a Medicare Advantage plan.


  • Part D: Prescription drug coverage

    • Part D helps cover prescription drug costs. Private companies run Medicare Part D.

    • You must sign up for Part A or B before enrolling in Part D.


High-income retirees may also face surcharges like IRMAA (Income-Related Monthly Adjustment Amounts).


Medigap Policies

Medicare Supplement Insurance (Medigap) is extra insurance from a private health insurance company to help you pay for out-of-pocket costs in Original Medicare (Parts A and B). Generally, you must have Original Medicare (Part A) to buy a Medigap policy.


Medigap policies help cover the following:

  • Copayments

  • Coinsurance

  • Deductibles


Importantly for high-net-worth individuals, some Medigap policies cover services that Original Medicare doesn't, like emergency medical care when traveling outside the U.S.


Medigap plans generally don’t cover:

  • Extended care (like a nursing home)

  • Vision or dental care

  • Hearing aids

  • Eyeglasses

  • Private-duty nursing


Medigap premiums vary widely depending on the insurance company, the plan, and where you live. Each company decides how to set the price for its policy.


Unique Considerations for High-Net-Worth Individuals

High-net-worth individuals have specific challenges and opportunities when managing their healthcare costs and insurance options. Their unique needs, along with their financial standing, lifestyle, and desire for privacy, often require a tailored approach.


  • Private Insurance

High-net-worth health insurance policies often come with unique features. These private plans can target particular needs and accommodate elements like international coverage, access to top medical specialists, and faster medical services. This is above and beyond what standard health insurance policies emphasize.


  • Concierge Medicine

Concierge medicine, known as retainer medicine, presents an alternative for high-net-worth individuals seeking personalized healthcare. With concierge services, individuals pay an annual fee to a chosen physician or medical practice. Those fees can be as high as $20,000 per year. In return, they receive expedited appointments, longer consultation times, and a more direct line of communication with their healthcare provider. This approach ensures that medical care is prompt and highly individualized.


  • Health Savings Accounts (HSAs)

If you have a high-deductible health plan (HDHP) with your employer, contributing to an HSA during your working years may allow you to accumulate tax-advantaged funds for certain medical expenses in retirement. HSAs offer flexibility and control over healthcare spending. These accounts have tax-advantaged features for contributions, growth, and withdrawals used to pay for qualified medical expenses, which can make them a popular choice for some. If you have one of these accounts and are still working, remember that an HSA doesn’t have a “use it or lose it” rule, so you don’t have to spend the balance by the end of the year.


Here are a couple of things to consider if an HSA sounds interesting. If you spend your HSA funds on non-qualified expenses before age 65, ordinary income taxes may apply, and it may result in a 20% penalty. But, after age 65, you may be required to pay ordinary income tax if the funds are used for non-qualified expenses. Also, remember that contributions are exempt from federal income tax but, in some cases, are not exempt from state tax.


Extended Care Needs

Not every retiree will require extended care services in their lifetime, but many will. According to the Administration for Community Living, a 65-year-old has a 70% chance of needing extended care.


Paying for extended care often involves a combination of funding sources. Medicare does not typically cover these services, so many people pay for the costs out of pocket. This can be daunting for even well-off individuals. According to Genworth, the estimated median cost of extended care in 2024 is $5,511 per month for assisted living and $10,025 per month for a private room in a nursing home.


You may want to consider other options to help cover some of these costs, but those solutions come at a price. Regardless of how you intend to pay for possible extended care needs in retirement, it should be factored into your overall retirement strategy.


Individuals concerned about potential extended care costs and estate strategies may want to explore the pros and cons of setting up an irrevocable trust. Irrevocable trusts cannot be modified or amended with the permission of the grantor’s beneficiary, so they can offer certain benefits when creating an estate strategy, depending on your specific situation.


It's important to note that the rules surrounding these strategies are complex and can vary based on individual circumstances and state laws. Using a trust involves a complex set of tax rules and regulations, so it's crucial to consult with qualified legal and financial professionals who can provide personalized guidance based on your specific needs and goals.


Estate Considerations for Healthcare

There are several legal documents that all people should have in place before they have a potential healthcare crisis as they get older. These documents are the building blocks of an estate strategy.


  • A medical power of attorney, often referred to as an “advanced medical directive,” “durable power of attorney for health care,” or “health care proxy,” is a specialized legal document that provides someone you choose with the legal capacity to make crucial medical choices in certain circumstances or execute them on your behalf only if you are unable to do so. This legal instrument proves highly beneficial if you ever encounter a situation where you cannot express yourself or rationally evaluate health-related concerns.

  • A living will is a written, legal document that spells out medical treatments you would and would not want to be used to keep you alive, as well as your preferences for other medical decisions, such as pain management or organ donation. Your living will should address several possible end-of-life care scenarios.


Beyond Insurance

There are a number of healthcare considerations in retirement that extend beyond insurance and Medicare. Here are just a few:


  • Holistic Health Management

Holistic health management is a medical approach that focuses on treating and preventing disease by addressing many aspects of a person's life, including mental, physical, spiritual, and social health.


While conventional medicine often focuses primarily on the physical symptoms of disease, holistic health also focuses on how other aspects of a person’s life contribute to their health.


Features of holistic health include education, self-help, and advocacy. Lifestyle and behavioral changes are also essential, focusing on elements that promote better health—nutrition, movement, sleep, stress management, and relationship support. These wellness programs and preventative care strategies can be attractive to retirees.


  • Medical Tourism

Medical tourism involves people seeking more affordable, sometimes higher-quality care outside their home country for a wide range of medical procedures, from elective surgeries to advanced care for complex medical conditions. It’s a multibillion-dollar market that continues to grow with globalization.


Medical tourism reasons vary but often include pursuing more affordable treatment options, accessing specialized medical expertise unavailable locally, and combining medical procedures with a luxury travel experience. Some individuals opt for health travel because specific treatments are not recommended locally, may be experimental, or the patient desires anonymity that can be found in a foreign country.


There are risks to pursuing care outside the traditional and highly regulated U.S. system. Differences in healthcare standards across countries may lead to discrepancies in the quality of care and patient safety. Thorough research and due diligence before choosing a health provider abroad are essential.


  • Leveraging Technology for Health Monitoring and Early Intervention

Some people are taking advantage of technological advancements to increase healthcare outcomes. Digital health is a rapidly growing field that offers exciting opportunities for innovation and improvement in healthcare delivery. The goal of digital health is to make healthcare more efficient, accessible, and effective by leveraging the power of digital technology to collect, analyze, store, and share health data. Electronic Health Records (EHRs), telemedicine, mobile health apps, wearable devices, the internet of medical things, and cutting-edge digital technology constitute digital health. The digital health market has been proliferating in recent years and is expected to continue its growth trajectory in the near future.


Navigating Healthcare with Confidence

Healthcare costs in retirement are complex, but proactive planning can make all the difference. As financial professionals, we’re here to help you:


  • Integrate healthcare costs into your retirement plan

  • Evaluate coverage options and their financial implications

  • Develop strategies to protect your estate from healthcare expenses


By using your resources, you can create a robust retirement strategy that’s designed to address all of your potential needs.


Preparing for healthcare in retirement is an ongoing process. We're here to support you every step of the way.


 Sources

4. Social Security Administration, September 20, 2024https://www.ssa.gov/medicare/plan/medicare-parts

13. National Library of Medicine, April 11, 2023https://www.ncbi.nlm.nih.gov/pmc/articles/PMC10089382/


The information contained on this site may not reflect current developments; does not constitute investment, tax, or legal advice; and should not be relied upon for such purposes. There is no guarantee that any forecasts made will come to pass. We make no representation about the accuracy of the information or its appropriateness for any given situation. This information is not an offering. Past performance does not guarantee future results.


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